The link between the current international monetary non-system, financialization and the Washington consensus

Luis Reyes

Research in International Business and Finance, 2017, vol. 42, issue C, 429-441

Abstract: The main purpose of the present work is to build a bridge between three concepts: the current international monetary system, financialization and the Washington consensus. Under this approach, the current international monetary non-system (that replaced the Bretton Woods system) imposed by Nixon in 1971 led to the oil shocks that in turn intensified the inflationary pressures of the rest of the decade. The bold resolution to end inflation in 1979 via high interest rates brought about a process of financialization that was cause and consequence of trade and financial liberalization. Interest rates eventually went back to levels comparable to those prevailing before the Volcker shock, which brought about a decline in firms’ demand for credit that obliged banks to seek for other clients, i.e. the rest of the world and households. The ideas embedded in the Washington consensus contributed to the development of this financialization/liberalization process, and these gained strength as the previous regime (characterized by low unemployment rates and high inflation) was being replaced by the current regime paradoxically called the ‘Great Moderation’. The process of financialization can be explained by the analysis of the capital structure of U.S. firms.

Keywords: Financial markets and the macroeconomy (E44); Policy objectives (E61); International monetary arrangements and institutions (F33); Foreign exchange (F31) (search for similar items in EconPapers)
Date: 2017
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Persistent link: https://EconPapers.repec.org/RePEc:eee:riibaf:v:42:y:2017:i:c:p:429-441

DOI: 10.1016/j.ribaf.2015.11.015

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